Mergering healthcare organisations should be viewed with caution, unless there are clear and demonstrable benefits to patient services, says Nuffield Trust chief economist Anita Charlesworth.

The NHS trust sector is now forecasting a surplus of just 0.1 per cent of income in 2011-12, with seven trusts alone forecasting an operating deficit of more than £180m combined. This is a marked deterioration from previous years and casts doubt over the sustainability of many organisations.

For a great many trusts seeking solutions to entrenched financial problems, the preference has been to merge.

The trend raises some important questions about the tensions between different elements of health policy. Can the Department of Health deliver choice and competition for patients and a viable network of trusts?

This month the Cooperation and Competition Panel delivered its verdict on one of the first big proposals aimed at placing a group of London trusts on a financially sustainable footing – the merger of Barts and the London, Whipps Cross and Newham trusts.

The panel originally found that the merger was not consistent with the principles and rules for cooperation and competition and would reduce choice and competition for care in Newham, possibly causing a negative impact on quality.

Despite this it has ultimately decided to recommend the merger on the back of parties agreeing to safeguards. Commissioner support for the merger was clearly very influential and a sign of how important commissioners will be in shaping the degree of competition and choice in the future NHS. But, the panel was not unanimous and some members believed an alternative option of merging Newham with Homerton University Hospital Foundation Trust was a suitable alternative.

For mergers to be approved the benefits arising from the potential economies of scale must outweigh the negative effect of dampened competition. The relative benefits to be achieved through economies of scale and the impact of a loss of competition and choice were at the heart of the dispute between parties in this most recent case.

The research evidence shows that scale does matter in healthcare – for both quality and cost – but these benefits may not be continuous. January’s Nuffield Trust evidence review Can NHS Hospitals Do More with Less? concluded that cost per case falls as hospital size increases to 200 beds, remains roughly constant until about 600 beds, above which diseconomies begin to appear. Many of the trusts contemplating merger would result in organisations with 600-plus beds.

The studies reviewed by the Nuffield Trust did not examine quality and it may be that quality gains from scale are sufficient to offset the increased cost. But economists at Bristol have raised further doubts about the benefit of mergers.

In Can Governments Do It Better? Merger Mania and Hospital Outcomes in the English NHS, Martin Gaynor and colleagues looked at the impact of the 112 NHS hospital mergers between 1997 and 2006. Although admissions, staff numbers and beds fell by an average of 11-12 per cent a year, operating expenditure did not fall at the same rate and the mergers did not stem the growing hospital deficits.

Crucially they found no significant improvement in productivity or quality attributable to mergers and waiting times also rose.

Although the Bristol results are similar to those found for the wave of mergers between private hospitals in the US in the 1980s and 1990s, two caveats should be mentioned. Hospitals are large and complex organisations and it may be that while the management upheaval and cost of a merger is felt immediately, benefits take longer to emerge.

Second, the research compares merged hospitals with un-merged. It may be that without merger, productivity and quality would have declined anyway or even worsened further.

Whatever the merits of the Barts and the London case, the new NHS Trust Development Authority should look closely at the competition panel’s report and the research evidence to ensure, before it puts its weight behind a wave of mergers, that it really is the best way to deal with poorly performing hospitals in the NHS.

Outside the Department of Health many are yet to be convinced that it will deliver significant productivity and quality gains – the public accounts committee is particularly sceptical.

But if merger is not the answer, what is the future for these struggling providers? Clearly there are no magic bullets. But if the NHS is to put in place a sustainable model for many of the trusts seeking foundation status, the key – missing – step is a proper understanding of why these organisations are financially challenged.

If it is because they are too small to be viable financially or clinically, a merger may deliver better outcomes for patients and taxpayers. But if size is not the problem and the issue lies in wider health economy problems, or transforming efficiency through clinical leadership, increasing the size of the organisation is unlikely to deliver.

This article also appears on the Nuffield Trust website.